Individuals with Flexible Spending Accounts (FSAs) may now be able to carry over up to $500 of their funds to the next year. Health FSAs allow individuals to set aside part of their paychecks pre-tax to pay for qualified medical expenses that are not covered by insurance throughout the year.
Flexible Spending Accounts are often offered to employees as part of a benefits plan. When employees incur medical expenses that are not covered by their health plan, such as copayments, deductibles, and some drugs, they submit for reimbursement. FSAs are limited to $2,500 per year.
Previously, FSAs operated under a use-it-or-lose it provision that left many scrambling to spend any leftover funds in December before they lost their funds in the new year. This in turn puts pressure on employers to process all of their employees’ reimbursement requests.
Another issue with FSAs is that many people are discouraged from opening an account in the first place due to their inability to predict just what their healthcare needs and costs will be in any given year, particularly when they know they will lose any funds from overestimating. Forfeited funds can be retained by the employer, used for plan administrative expenses, or dispersed to employees.
Some employers under the current law permit employees to use money remaining at the end of year for a grace period of two and a half months into the new year. Now, a health FSA can have either a carryover provision or a grace period, but not both.
IRS Notice 2013-71, 10-31-2013 permits employers to allow FSA plan participants to carry over up to $500 of their unused health FSA balances at the end of a plan year. Analysts expect this new provision to encourage more people, including low- and moderate-income individuals, to sign up for FSAs. The “use-it-or-lose-it” provision had previously been in effect for 30 years.
To learn more about Flexible Spending Accounts, the U.S. Treasury has provided a fact sheet.
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